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Student Loan Repayment Guide

| October 09, 2018
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There are more than 44 million Americans that have student loans with debt totaling $1.5 trillion. It's a problem. The best way to figure out and reduce that problem is to pay those loans back.

There are many different types of repayment methods and they often depend on the type of loan you have.

In this article, we will focus on the different types of loans available and their subsequent repayment plans.

Types of repayment plans

  • Standard Repayment - the most widely used repayment method. Repayment term of up to 10 years with a minimum payment of $40-$50 per month, depending on the type of loan.
  • Graduated Repayment - designed for people with a loan income now, but foresee higher earnings in the future. Starts with a low monthly payment, but the minimum increases every two years, with a 10-year term. Types of loans that qualify:
    • Direct Subsidized Loans
    • Direct Unsubsidized Loans
    • Direct PLUS Loans
    • Direct Consolidation Loans
    • Subsidized Federal Stafford Loans
    • Unsubsidized Federal Stafford Loans
    • FFEL PLUS Loans
    • FFEL Consolidation Loans
  • Extended Repayment - Gives you up to 25 years to pay off your loan, which leaves you with smaller monthly payments. Same loans from above qualify for this repayment plan.
  • Income-Based Repayment - Based on how much you CAN pay, not how much you owe. When applying, the government looks at your income, family size, and the state you live in. This applies to federal loans only.
  • Income-Contingent Repayment - Limits payments to 20% of your discretionary income. Available for federal loans only. This repayment plan also offers forgiveness on your remaining balance after 25 years.
  • Income-Sensitive Repayment - With this type of plan, you have the ability to choose what you pay, as long as it is greater than or equal to the amount of interest accrued each month. This option, however, is only available for 5 years and could increase your monthly payments down the road. The standard term of 10 years. If unable to pay off within 10 years, you can switch to another form of income-driven repayment.
  • The PAYE Plan - Payment amounts are limited to 10% of your discretionary income. After 20 years of payments, any balance left over is forgiven as long as you didn’t miss any payments. Only eligible for federal loans.
  • The REPAYE Plan - Almost identical to the PAYE plan. Eligible for federal loans only. Re-established in order to be eligible for more people.

What type of loan do you have?

The type of repayment plan available to you very much depends on the type of loan(s) you have. For example, for all of the income-driven repayment plans, private loans are not eligible.

This also applies to loan forgiveness. Federal loans are the only ones eligible to be forgiven.

Deferment and Forbearance

Deferment - May give the ability to temporarily stop or reduce payments. This could help you avoid defaulting on your federal student loan. With a deferment, you may not be responsible for the interest that accrues during the deferment period.

Loan types where you are not responsible for interest:

  • Direct subsidized loans
  • Subsidized federal stafford loan
  • Federal perkins loan
  • Subsidized portion of direct consolidation loan
  • Subsidized portion of FFEL consolidation loan

Loan types where you ARE responsible for interest:

  • Direct unsubsidized loan
  • Unsubsidized federal stafford loan
  • Direct PLUS loan
  • Federal family education loan (FFEL) PLUS loan
  • Unsubsidized portion of direct consolidation loan
  • Unsubsidized portion of FFEL consolidation loan

Need to submit a request to your loan servicer, often explaining how/why you are eligible for deferment.

Forgiveness - Your remaining balance is “paid” by the government. Federal student loans are the only ones eligible for forgiveness.

Debt.org wrote a great article about student loan forgiveness, when it applies, and what jobs are eligible. Click here to read that article.

Cancellation of loan

Cancellation and forgiveness can sometimes be used interchangeably, but cancellation is specific to a couple of different causes.

  • Death - if the student loan borrower dies, that loan is canceled and no longer required to be paid back.
  • Disability - if the borrower becomes disabled and can no longer work in order to make payments, their loan can be canceled.
  • School closes - if you apply and are accepted for a student loan and your school closes, your loan will be canceled.
  • Bankruptcy - If you file for bankruptcy, your loan could be canceled, depending on what type of bankruptcy you file for.

Refinance

Check out this article I wrote about student loan refinancing.

Possible Consequences

If you defer your student loans, you quite possibly could be increasing the amount outstanding. If you fall under one of the loans from above that are still responsible for their interest during deferment, you are increasing how much you owe.

If you graduate college and are able to get a job that either a) helps you with your student loans or b) pays you enough so you can start paying your loan back, good on you. Unfortunately, that’s not the case for most people. While you are scraping by to pay off your student loans, and unable to save for retirement because you can’t afford to, you are hurting yourself.

Every year you put off starting your retirement savings, increases the magnitude by which you will have to save in the future.

This also can have negative consequences on the economy. Because people are spending money on servicing their loan, it takes away their ability to spend, buy houses, and start businesses.

Conclusion

There’s no doubt that going to college and obtaining a degree for an in-demand field can increase your income, employability, and can benefit the economy. So if you need help paying for college, it’s important to understand how to pay those loans back, and it’s important to know what payment methods are available.

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